Treasury 30-year bonds snapped a three-day decline as Greece struggled to reach an agreement on budget-cutting measures needed to get an international bailout, boosting demand for safer assets.
Ten-year notes gained earlier after Fitch Ratings said a Greek disorderly default “cannot be wholly discounted.” Ten- year Treasuries yielded more than German bunds for the first time in four days as the U.S. prepared to sell $72 billion of debt this week, starting with an auction of three-year securities tomorrow.
“What’s going on in Greece underlines the difficulty and risk the euro region is still facing in order to sort out its debt problem, and that is supporting demand for highly rated government bonds,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Treasury yields should have been higher because of the improving U.S. economic outlook, but risk aversion is keeping them low.”
The 30-year yield fell one basis point, or 0.01 percentage point, to 3.11 percent at 10:55 a.m. in London after rising 18 basis points in the previous three days, according to Bloomberg Bond Trader prices. The 3.125 percent bond due in November 2041 rose 1/8, or $1.25 per $1,000 face amount, to 100 7/32.
The 10-year yield was little changed at 1.92 percent after earlier falling to 1.9 percent. Germany’s 10-year yield declined four basis points to 1.89 percent.
Financial Collapse
Treasuries snapped last week’s decline as European officials and Greek policy makers failed to produce an aid package for the nation.
European leaders maintained pressure on Greece to accept terms demanded by international lenders during a weekend of talks to avert a financial collapse. Interim Greek Prime Minister Lucas Papademos struck a tentative deal with party leaders to boost economic competitiveness and extend spending cuts after euro-area finance chiefs told them an increase in the 130 billion-euro ($170 billion) aid package wasn’t forthcoming.
“Treasuries will be bullish because the Greek debt solution is not going smoothly,” said Will Tseng, a Treasuries trader at Taipei-based Shin Kong Life Insurance Co., which has the equivalent of $52.1 billion in assets.
Ten-year yields may fall to 1.7 percent in the first half of 2012, he said.
“Fitch expects Greece to undertake an orderly debt restructuring, which would ensure that a payment system is in place,” the ratings company said in a statement today. “However, a disorderly default, which may include an exit from the euro zone, cannot be wholly discounted.”
Slow Inflation
Slow inflation has spurred demand for Treasuries, keeping yields down as President Barack Obama finances a $1.1 trillion budget deficit to boost an economy still growing at rates below the 20-year average. The Fed set an annual inflation target of 2 percent two weeks ago, and policy makers suggested they may conduct a third round of bond purchases.
“Any way you look at it, the Treasury market is still expecting rather benign inflation, and we will be in a low-rate environment for some time,” David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut, said Feb. 1 in a telephone interview.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.17 percentage points, from as high as 2.67 percent in April 2011.
Job Report
U.S. government bonds tumbled on Feb. 3 after the Labor Department said employers added 243,000 jobs in January. The median forecast of economists in a Bloomberg News survey was for 140,000. The jobless rate slid to 8.3 percent, the lowest level in three years.
“Investors will realize that the U.S. economy is stronger than expected,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “They will push up yields.”
The difference between yields on 10-year notes and 30-year bonds may widen as investors prepare for the sale of the longer maturities, Barclays Capital Inc. said today in its market- outlook report. The company is one of the 21 primary dealers that trade with the Federal Reserve.
The spread widened to 1.22 percentage points on Feb. 3, the most since September, according to data compiled by Bloomberg.
The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June.
Fed Buying
The central bank is scheduled to buy as much as $2 billion of securities due from February 2036 to November 2041 today as part of the plan, according to the New York Fed’s website.
Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, maintained their bearish stance on Treasuries. Ried’s index on the market outlook through June was unchanged at 45 for the week ended Feb. 3. A figure below 50 shows investors expect Treasuries to decline.
In addition to tomorrow’s three-year auction, the U.S. will sell $24 billion of 10-year debt on Feb. 8 and $16 billion of 30-year bonds on Feb. 9.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
